Futures Trading Costs and Market Microstructure Invariance: Identifying Bet Activity

49 Pages Posted: 28 Dec 2022

See all articles by Ai Jun Hou

Ai Jun Hou

Stockholm University

Lars L. Norden

Stockholm University - Stockholm Business School

Caihong Xu

Stockholm University - Stockholm Business School

Date Written: December 18, 2022

Abstract

Market microstructure invariance (MMI) stipulates that trading costs of financial assets are driven by the volume and volatility of bets, that are, transactions intended to produce idiosyncratic gains based on investors’ beliefs. With futures transactions data, we estimate bet volume as the trading volume of brokerage firms that trade on behalf of their clients and bet volatility as the trade-related component of futures volatility. We find that the futures bid-ask spread lines up with bet volume and bet volatility as predicted by MMI, and that intermediation by high frequency traders does not interfere with the MMI relation.

Keywords: Market microstructure invariance, bet volume, bet volatility, transactions costs

JEL Classification: G12, G14, G15, L10

Suggested Citation

Hou, Ai Jun and Nordén, Lars L. and Xu, Caihong, Futures Trading Costs and Market Microstructure Invariance: Identifying Bet Activity (December 18, 2022). Available at SSRN: https://ssrn.com/abstract=4306393 or http://dx.doi.org/10.2139/ssrn.4306393

Ai Jun Hou

Stockholm University ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

Lars L. Nordén (Contact Author)

Stockholm University - Stockholm Business School ( email )

Sweden

Caihong Xu

Stockholm University - Stockholm Business School ( email )

Roslagsvägen 1010
Stockholm, SE-106 91
Sweden

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